Republicans Change Their Tune on Tax Cuts and the Debt

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The details are coming. Really. Well, maybe. What we know for now is that we’re supposed to get more information on the Republican tax reform plan next week. In the meantime, to the frustration of some, what we have are questions. Lots of questions.

One of the big ones getting renewed attention: Will the tax plan be “revenue neutral,” meaning that it will raise at least as much money for the government as the current code does?

House Speaker Paul Ryan notably refused to reaffirm his commitment that it would be when asked about it last week by an Associated Press reporter. The key quote from Ryan: "We want pro-growth tax reform that will get the economy going, that will get people back to work, that will give middle-income taxpayers a tax cut and that will put American businesses in a better competitive playing field so that we keep American businesses in America. That is more important than anything else."

Ryan’s reluctance to push for tax overhaul that won’t balloon the national debt reflects a broader shift in the GOP, as the AP’s Andrew Taylor reported this weekend in a piece headlined “Tax cuts quiet once-deafening GOP call for fiscal discipline.” Deficits are on the rise again, but few tax reformers are talking about them, Taylor notes:

“The tea partyers and other conservatives who seized control of the House in 2010 have morphed into Ronald Reagan-style supply siders while the GOP's numerous Pentagon pals run roughshod over the few holdouts. Tax cuts in the works could add hundreds of billions of dollars to the debt while bipartisan pressure for more money for defense, infrastructure, and domestic agencies could add almost $100 billion in additional spending next year alone. The bottom line is the $20 trillion national debt promises to spiral ever higher with Republicans controlling both Congress and the White House.”

So it looks like there are new rules for tax reform and the deficit. Here are five takes on why the lack of revenue neutrality is or isn’t a problem:

Supply-Side Optimism About Economic Growth:"For a variety of reasons surrounding shrewd moves by President Trump, the chances for significant tax cuts in the next ten weeks have risen sharply.” But it's not just Trump providing reason to believe tax cuts can happen this year. "It looks like Paul Ryan is taking off his CBO green eyeshades. Rather than insist on 'revenue neutral' tax policy, he seems to be returning to his Jack Kemp, supply-side roots, arguing that growth is the most important issue." The ten-year budget window can be extended to 20, giving tax cuts more time to bring about "an American prosperity renaissance." Sure, the GOP still needs a budget resolution to make it happen without Democratic votes. "But where there’s strong political will, legislative ways and means will be found. Ten weeks is plenty of time." – Larry Kudlow, CNBC

A Corporate Tax Cut Is Worth the Short-Term Hit: “Alas, Republicans cannot seem to cut spending, and they have not yet agreed on which tax breaks to repeal. Without such deficit offsets, they should scale back their tax package to just the most pro-growth elements, particularly a corporate tax rate cut. A corporate cut would initially reduce federal revenues, but over time companies would build more U.S. factories, bring foreign profits back home, and evade taxes less. The tax base would expand and reduce any resulting deficits over time.” – Chris Edwards, director of tax policy studies at the Cato Institute, USA Today

We’ve Heard Promises of Deficit-Fueled Growth Before: “Yes, Republicans promise us tax cuts will lead to a surge of investment and growth, but we’ve heard this one before. It didn’t happen when we had big tax cuts under Ronald Reagan and it didn’t happen when we had big tax cuts under George W. Bush. In both cases, the deficit surged. If there was any positive impact on growth, it was too small to notice and certainly not enough to offset the impact of the tax cut.” Once revenues fall, the same people pushing tax cuts will go back to warning about the size of the deficits. “This leaves two options: cutting spending or raising taxes on the rest of us. Neither of these prospects looks good for people who don’t own lots of stock in corporate America.” – Economist Dean Baker, Tribune News Service

The Economic Consequences Could Be Dangerous: “Deficit financed cuts undermine the growth from reform because the higher growth from cuts can easily be outweighed by the negative economic effects of the additional debt. We are particularly vulnerable to the negative economic consequences of too much debt given our current fiscal situation. When President Bush entered office and pursued tax cuts, the budget surplus was 2.7% of GDP. Today we have a deficit of 2.9%. And with Bush the debt was 33% of GDP; today it is 77%. So further blowing a hole in the fiscal situation could do a great deal more damage to the economy.” – Maya MacGuineas of the Committee for a Responsible Federal Budget, Forbes

It Won't Be Easy to Find New Revenue: “The chore of finding new revenue is what generates all of the political pain in the process. The resistance to [Paul Ryan’s proposed border adjustment tax] indicated the enduring truth of that. And the party hasn’t yet settled on any replacements. … one proposal to gin up new funds — a repeal of the deduction for state and local taxes — is being met with howls of protest from Republicans in high-tax states.” – Tory Newmyer, Washington Post

As editor in chief, Yuval Rosenberg oversees all aspects of The Fiscal Times' website and email newsletter. His writing has appeared in publications including BusinessWeek, CNBC.com, CNNMoney.com, Fast Company, Fortune, Newsweek, Money and Time.